MBA Data Suggest Mortgage Demand for Home Purchase Is In Early Stages of Recovery

According to the Mortgage Bankers Association (MBA), the seasonally adjusted total mortgage applications index, a measure of mortgage demand, declined by 4.2% in the week ending on October 12, 2012. The reported decline in the weekly total mortgage applications index reflected a 5.3% decrease in MBA’s total refinance application index. Applications for refinancing represent 81.7% of total applications. While the applications for refinancing declined, the applications for purchases index rose by 1.0%. Despite this most recent release, applications for refinancing have moved broadly higher since the beginning of 2011 whereas the mortgage applications for purchase index has trended flat since 2010.

Data from the Federal Home Loan Mortgage Corporation, Freddie Mac, show that mortgage interest rates continued their descent. In the week ending October 18, 2012, the 30-year fixed rate mortgage settled at 3.37%, a 2 basis point decline from the previous week. The newly released data is consistent with the broader trend of lower mortgage rates. The path of mortgage rates largely reflects the actions taken by the Federal Reserve’s Federal Open Market Committee (FOMC), including their most recent announcement that they will begin purchasing $40 billion of agency mortgage-backed securities, to push interest rates down. Since this FOMC statement was released on September 13th, the 30-year mortgage rate has fallen by 22 basis points on a weekly basis and the spread between the 30-year mortgage and the 10-year Treasury note has tightened by 34 basis points.

Although total mortgage applications for purchase have remained flat, the underlying components have begun to normalize. Historically, demand for conventional mortgages for purchase exceeds those of government mortgages. Between 2000 and 2002, the spread between these two indices averaged 229.0 points. During the housing boom, this difference rose to an average of 550.0 points as conventional mortgage applications for purchase became easier to obtain. Following a steep decline in conventional mortgage applications for purchase, demand for conventional mortgages for purchase leveled off in 2010 and 2011 and matched the government mortgage applications for purchase index. Since the beginning of this year, conventional mortgage applications have risen by 44.2% and again exceed their government counterpart. Recent acceleration in conventional mortgage applications for purchase suggests that mortgage demand is strengthening, though it remains well below normal. Since government mortgage applications for purchase were less effected by the boom and bust cycle in the housing market, restoring the level of total mortgage applications will require continued recovery on the conventional side.

[…] Mortgage data from the Mortgage Bankers Association still do not indicate an expansion for home purchase debt, suggesting that home sales are still relying on investors and cash buyers to a greater degree than history would suggest is normal. […]